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Trinity International LLP

Undertaking successful PPPs for Clean
Technology Development in Azerbaijan

By Ana-Katarina Hajduka (ana-
katarina.hajduka@trinityllp.com)

                                        24 October 2013

Clean technologies in Azerbaijan
   Azerbaijan is blessed with rich energy resources (both fossil fuels and renewable)

   Many fossil fuels rich countries are turning their energy strategies towards
    developing greater penetration of renewable energy (Qatar, UAE etc)

   Azerbaijan has an opportunity to create significant wealth by generating greater
    levels of renewable energy and exporting fossil fuels for revenue

   Azerbaijan can help diversify its economy away from fossil fuels via renewable
    energy development

   Azerbaijan can achieve further convergence with EU legislation by introducing EU
    standards on renewable energy

Current positive developments
 Since 2009, Azerbaijan has been signatory to the IRENA
 Since 2009, Azerbaijan has created the State Agency on Alternative and Renewable Energy
  Sources (SAARES). As of June 2012, SAARES has become the State Company on Alternative
  and Renewable Energy Sources.
 The Ministry of Energy and Industry announced in January 2013 that Azerbaijan hopes to raise
  over 75 billion US in alternative energy investments by 2020, and increase total renewables
  capacity to 2,000 MW – 20% of the nations’ overall power needs.

Current positive developments
29 December 2011, Order of the President of Republic of Azerbaijan on preparation of National
Strategy on the use of Alternative and RES for 2012- 2020
Objectives:
 To create truly sustainable energy system for Azerbaijan
 To prepare and present national strategy for the use of alternative and renewable energy (not yet
     prepared)
 To determine key directions for the production of electrical and thermal energy from renewables
 To create the legal framework for the usage of renewable energy (not yet created)
 To establish optimal conditions for the promotion of renewable energy sector

Azerbaijan’s 2020 Renewable Energy Targets
In April 2012, the director of SAARES, Dr Akim Badalov, stated that Azerbaijan has set the following
targets for the development of renewable energy by 2020:
 20% share of renewable energy in electricity
 9.7% share of renewable energy in all energy consumption
 2,000 MW of installed renewable energy capacity by 2020

SAARES Initiatives
•    Establishment of Experimental Polygon and Training
•    Center in Gobustan for researches of local grid connections with global electricity networks
•    Establishment of hi-tech parks for technology transfers in RE and energy efficiency infrastructures

Other Initiatives – Baku waste to energy plant

Other Initiatives – Baku waste to energy plant

  First large scale PPP
  Procured by the Ministry of Economic Development Azerbaijan
  A design, build and operation (DBO) 20-year contract was awarded to a
   French firm CINM
  Capacity of 500,000 tons of municipal solid waste per year, comprising two
   incineration lines; each line with 250,000 tons capacity.
  It is hoped over 231 million kWh/year of electricity will be produced from the
   facility
  The plant was built in the new Balakhani Eco Industrial Park
  Large scale 346 million Euro project
  Intended to reduce the need for future landfills and to make use of the
   energy released in the thermal treatment process to generate electricity and
   heat. The plant commissioning will create about 100 jobs.

General Problems for PPP
development in Azerbaijan
Lack of private sector interest due to:

   No legal and regulatory framework for PPPs available
   Few demonstrated pilot projects in renewable energy
   Enormous administrative and legal impenetrability and lack of clarity
   Competition from a monolithic, monopolistic giant i.e. Azereenergy
   No ability to raise capital locally and the international banks are largely absent
   Low electricity tariffs that were set in 2007 and are still valid for 2013
   Lack of a legal basis for connection to the grid

Current Legal and Regulatory Framework in
Azerbaijan
  General Legislative and Institutional Framework
 There is no clear legal and regulatory framework for PPPs in Azerbaijan.

  Scope of Authority to award projects
 There is no PPP legislation and the legal framework does not identify the public authorities of
 the host country that are empowered to award and/or enter into PPPs.

  PPP Procurement
 There are no rules and/or policies on PPP procurement in Azerbaijan.

  Administrative Co-ordination
 No adequate institutional mechanisms have been established to co-ordinate the activities of the
 public authorities responsible for issuing approvals, permits, licences and consents needed for
 the implementation of the renewable project.

How to amend current Legal and Regulatory
Framework in Azerbaijan (1)
    General Legislative and Institutional Framework

    Private participation in PPP projects should have a clear basis in policy, with broad government support.
     The existing laws should be amended to comply with the EBRD requirements for a well defined PPP legal
     and regulatory framework.

    Scope of Authority to award projects

    Identify the agency, ministry or other procuring authority in charge of the procurement process and the entity
     that will execute the PPP agreement with the private sector.

Make sure that:
 That there is a clear route map for obtaining all of the necessary consents for a project;
 That a realistic timetable is set for the obtaining of these consents and that the timetable is delivered;
 That the number of “gateways” and consents is minimized to the maximum extent possible; and
 That the negotiating parties are clearly authorized to make the necessary decisions to drive the project
    forward and will not be overruled in an arbitrary fashion.

How to amend current Legal and Regulatory
Framework in Azerbaijan (2)
   Administrative Co-ordination
   Adequate institutional mechanisms should be established to co-ordinate the activities of the public
    authorities responsible for issuing approvals, permits, licences and consents
   Regulatory competence should be entrusted to functionally independent bodies sufficiently autonomous
    to ensure their decisions are taken without political interference
    Rules governing regulatory procedures should be publicly available.
   Government Support
   The government should consider introducing feed-in tariffs for renewable energy development and other
    direct promotion through governmental support programme.
   The government should consider introducing quota obligations and/or soft loans for renewable energy
    development.
   The government should introduce fiscal incentives and/or grants and rebates for renewable energy
    development.
   The government should adopt renewable energy targets.
   Consider introducing a subsidy to the private sector on initial investment.
   Unconditional guarantee that all produced energy by IPP’s is purchased

How to amend current Legal and Regulatory
Framework in Azerbaijan (3)
Selection of the IPP developer

   Set out in the law clear procurement processes which are suitable for PPP structures.

   Design a procurement procedure which includes conditions that encourage competition
    between bidders so as to allow public authorities to achieve better value for money.

   Advertise projects appropriately, using accessible forms of media.

   Use award criteria that are objective and transparent.

   Publicly advertise contract award.

   Notify unsuccessful bidders of decisions and provide an opportunity to give a debrief of
    their bid, setting out the reasons for elimination.

How to amend current Legal and Regulatory
Framework in Azerbaijan (4)
   Finance

 Security of property rights is obviously essential for fostering private investment in any country.
 There should be no restrictions on foreign or private ownership.

   Security

The PPP legislation should specifically permit the following:
 Mortgages over any land and property held by the project company;
 Fixed and floating charges over shares of the project company and any plant and machiner
    credit balances, book debts, intellectual property and other beneficial interests;
 Assignment of insurance policies by way of security.
 Etc.

Final Recommendations
 Renewable energy development should continue to be a priority for Azerbaijan.

 Part of the oil and gas revenues should be dedicated to renewable energy development and a
  renewable energy fund should be created.

 The Government can establishing a Clean Energy Fund to co-finance the green projects.

 Grid connection rules, tariff methodology and incentives should be developed in order to
  attract investments in the renewable energy sector.

 Part of the resources of the State Oil Fund and State Oil Company can be directed to co-fund
  renewable and alternative energy projects.

Trinity International LLP
Ana-Katarina Hajduka